I do agree with my fellow combatant, Charly Travers, that one should not buy stocks at any price and at any time -- even if they're good companies. I certainly think that the monstrous run-up in price by Intuitive Surgical
With that said, the reason I still believe that Intuitive Surgical remains a buy is based more upon the actuality of what investors have been willing to pay for the stock in past practice as opposed to what they should be willing to pay for the stock from a theoretical standpoint. The following table shows the earnings multiples that Intuitive Surgical has traded at for the past eight fiscal quarters.
Results
|
FY |
Quarter |
Stock Price |
P/E (ttm) |
|---|---|---|---|
|
2007 |
Q2 |
$198.59 |
80.1 |
|
2007 |
Q1 |
$131.75 |
61.9 |
|
2006 |
Q4 |
$116.77 |
61.8 |
|
2006 |
Q3 |
$100.68 |
39.0 |
|
2006 |
Q2 |
$99.30 |
37.1 |
|
2006 |
Q1 |
$127.00 |
48.1 |
|
2005 |
Q4 |
$114.69 |
45.7 |
|
2005 |
Q3 |
$90.20 |
59.3 |
Now when we look at the P/E ratios for the trailing 12 months, the company's current stock price is, in fact, significantly pricier than has been the case historically. But I believe that, because the company has clearly demonstrated its ability to grow both its revenue and earnings at a scorching pace, it stands to reason that a forward P/E ratio would make for a more relevant valuation metric. The following shows a modified version of the company's forward P/E and the underlying assumptions:
Assumptions
- The EPS used to calculate the forward P/E is the sum of the actual EPS results for the subsequent four quarters, with EPS projections factored into the calculation for Q3 2006 and subsequent quarters.
- An assumed quarterly EPS growth rate of 16.2% was used for future quarters and is based upon the average EPS growth of the company's five most recent quarters.
Results
|
FY |
Quarter |
Stock Price |
Forward P/E |
|---|---|---|---|
|
2007 |
Q2 |
$198.59 |
42.6 |
|
2007 |
Q1 |
$131.75 |
32.8 |
|
2006 |
Q4 |
$116.77 |
34.4 |
|
2006 |
Q3 |
$100.68 |
34.2 |
|
2006 |
Q2 |
$99.30 |
40.0 |
|
2006 |
Q1 |
$127.00 |
59.6 |
|
2005 |
Q4 |
$114.69 |
60.7 |
|
2005 |
Q3 |
$90.20 |
35.0 |
As you can see, a forward P/E ratio based upon the above assumptions makes the stock no more expensive than when it was trading for less than $130 per share in early 2006. Looking at the price trend from a forward perspective would indicate that, while investors might be willing to pay a premium for Intuitive Surgical, the premium that they're paying now is hardly any greater than what they have been paying in recent quarters. And while the stock might be overvalued in theory, practice coupled with the company's future earnings and revenue prospects would indicate that it has yet to reach its zenith.
You're not done yet! Read the other arguments and then vote for the winner.
Fool contributor Billy Fisher does not own shares of any of the companies mentioned. Intuitive Surgical is a Motley Fool Rule Breakers recommendation. The Fool has a disclosure policy.
